Energy Exchange Series Keynote: Responding to the Major Forces Shaping Energy Today

SPEECH BY EILEEN CLAUSSEN

PRESIDENT, CENTER FOR CLIMATE AND ENERGY SOLUTIONS

ENERGY EXCHANGE SERIES BREAKFAST

BRISBANE, AUSTRALIA

OCTOBER 25, 2012

Thank you very much. It is wonderful to be here in Brisbane. I want to thank the Energy Policy Institute of Australia and Rio Tinto for bringing us together today for this timely discussion. This is the fourth breakfast in this series and all of them have been quite well attended, which suggests to me one of two things: Either the event sponsors have done an excellent job putting together some provocative discussions, or all of you really enjoy eating breakfast.

I also want to thank the conference sponsors for allowing me to escape the United States at an opportune moment. Although Australian politics has its share of vitriol, it is nice to be missing the onslaught of negative presidential campaign ads back home. A couple of weeks ago, the candidates argued about the fate of public television and the children’s TV character, Big Bird.

All I can say is this is a perfect example of politics at its most … fowl.

In all seriousness, I know you have spent these breakfasts talking about the future of energy, and I will do that as well. But I would not do justice to the mission of my organization if I did not focus on the intersection between our energy future and the future of the global climate.

Many of you may have known my organization as the Pew Center on Global Climate Change. About a year ago, we became the Center for Climate and Energy Solutions – C2ES. Our focus remains the same: working in and outside the United States to advance policy and action to address the twin challenges of energy and climate change. We are engaged in this work because we believe real challenges require real solutions.

The real challenge I want to talk about today is, I believe, one of the most important of the 21st century: that is providing safe, affordable and reliable energy for all, while at the same time protecting the global climate.

And the real solution to this challenge? Simply put, we must transition to a low-carbon economy. It may sound simple, but it is a very tall order.

To help put it in perspective, I’d like to do three things this morning. First, I will highlight the primary forces shaping the energy picture today. Then I’ll look at what key countries are – or are not – doing to move us toward a low-carbon economy. And finally I will make some suggestions about what we must do to make this transition real.

I’d like to begin by restating the challenge we face. Remember, it’s a two-part challenge – and the trick is dealing with both parts together. The first part we all get. We need affordable, reliable and safe energy because millions around the world still lack it, and because we cannot continue to grow our economies without it. The connection between energy, improved living standards, and economic growth is quite clear.

But what about the second part of the challenge? Why do we need to protect the global climate? In short, because the world is getting warmer. And the reason it is getting warmer is because we continue to produce enormous amounts of greenhouse gases, mostly by burning fossil fuels.

According to most scenarios, global emissions of greenhouse gases would have to peak by 2015 for us to have a reasonable chance of limiting global warming to no more than 2 degrees Celsius. That is the goal embraced by the world’s governments, first in Copenhagen in 2009, and again in Cancun in 2010.

At this stage, I think it would take heroic efforts around the globe to meet that goal. But if we exceed it, we will be entering very dicey territory.

Indeed, we are already experiencing the impacts of warming. Climate change is no longer a theory. It is here and now.

The global temperature has been above the 20th century average for 331 months in a row. That means the last time the global temperature was below average was February 1985.

In the United States, we had the hottest July in 118 years of recordkeeping. We also experienced some of the worst wildfires in our history and the worst drought in half a century.

We are not alone. Here in Australia, you have seen your own heat waves, flooding, wildfires and drought. And ocean warming and acidification, both caused by growing carbon dioxide emissions, threaten the future of the Great Barrier Reef ecosystem.

It is bound to get worse if we cannot once and for all get a handle on greenhouse gas emissions. Yet they keep rising.

Between 2009 and 2010, worldwide carbon dioxide emissions jumped 6 percent; it was the largest year-to-year increase on record. Of course, this global increase masks important national differences. While in most developed countries emissions are stabilizing or on the decline, emissions from China, India, Indonesia and other developing countries are growing rapidly. By 2035, if current trends continue, China alone will be responsible for one-third of global emissions.

So, with global emissions growing, and with the world already experiencing the weather extremes that scientists have always said would accompany global warming, it is time to face facts. It is time to jumpstart the transition to a low-carbon economy because it is only through this transition that we can meet both challenges: providing safe, reliable energy and addressing climate change.

So let’s look at the major forces shaping the production and use of energy today, and then drill down (no pun intended) to what governments are doing in key parts of the world to redirect our energy future. I’ll focus in particular on China, the United States, Europe and Australia. I also want to touch briefly on what we can hope to see from the new round of international climate talks launched last year in Durban.

We see five forces shaping our global energy future.

The first is rising demand. Even with the global economy still in recovery, developing countries are growing quite fast (China, in a year of “slowing growth,” still grew by 7.8 percent in the first half of this year.) And with that economic growth comes a rising middle class that wants cars and air conditioners and other essentials of modern life that require energy. Global energy demand is projected to rise 50 percent over the next 20 years, with more than 80 percent of this growth in developing countries.

A second major force shaping the world’s energy future is a growing desire for energy security. Countries are anxious. They don’t want to be tethered to just one or two sources of energy, especially if it comes from beyond their borders. So they are enhancing their energy security in three ways: by developing domestic energy sources; by diversifying their energy supplies; and by improving energy efficiency.

A third major force is new technology. Only recently did hydraulic fracturing advance to a point where it was economical to extract natural gas from the shale formations under large swaths of the continental United States Now the U.S. is in the midst of a fracking revolution. Our Energy Information Administration projects that shale gas production in the U.S. will jump 170 percent by 2035, and over the coming decade, the U.S. might become a net exporter of liquefied natural gas. A dramatic example of how technological breakthroughs can rewrite our energy future.

A fourth force shaping the energy picture is what I will call the unforeseen. Think of the Fukushima disaster, which could dramatically reshape the trajectory of nuclear power worldwide. Similarly, the Arctic is melting faster than we’d anticipated, prompting new competition for its vast energy resources. Not long ago, few analysts would have predicted the sustained high price for oil that has made it worthwhile to unlock the potential of oil sands, making Canada the world’s No. 3 oil producer and changing the geopolitics of the oil market. It’s impossible, of course, to predict what other unforeseen circumstances we might soon face.

The fifth important force is policy. While market forces may predominate, governments around the world are adopting a range of policies to try to meet their current and future energy needs. I’ll note that, as countries craft these new energy policies, climate change is, more often than not, an afterthought.

I want to focus on this last force – policy – in four parts of the world because, in the end, only through policy can we harness or manage these other forces to deliver the low-carbon transition we need.

First, China. At your February breakfast, you heard directly from influential Chinese energy policy maker Zhang Guobao (pronounced: Jong Gwoh-Baugh). Mr. Zhang explained how China has surpassed the United States to become the world’s largest energy producer and consumer.

Because of its rising demand, China increasingly is concerned about the security of its energy supplies. China is the second largest net importer of oil in the world, and this accounts for many of its actions on the international stage. For example, China is nowhere near the Arctic, but with recent melting opening new possibilities for oil exploration, China is now lobbying for permanent observer status at the Arctic Council.

China also is looking to diversify its energy supplies beyond oil and coal. It has set a goal of 15 percent of total energy output from renewable sources by 2020, and invested heavily to lead the clean tech market. China is now the world’s number-one solar manufacturer and home to four of the world’s top 10 wind turbine manufacturers.

China is mindful not only of commercial and energy security concerns, but also of the climate. China, after all, has not been immune to extreme weather. Since the summer of 2007, it has experienced major flooding and hurricanes. Heavy snowstorms last winter disrupted travel during the Lunar New Year celebration.

Increasingly, climate is an explicit focus of Chinese policymaking. Having pledged in Copenhagen to reduce its carbon intensity 40 to 45 percent from 2005 levels by 2020, the government effectively legislated this goal through targets and actions in its 12th five-year plan. Among other things, China is setting up seven local or regional greenhouse gas trading systems, with the goal of moving toward nationwide trading.

These are impressive steps, but they are hardly enough. China’s greenhouse gas emissions already exceed those of Europe and the United States combined, and they are projected to rise 45 percent between 2009 and 2020. The country has doubled its electric generation capacity since 2005, but just 0.2 percent of it is solar. Meanwhile, coal generating capacity has tripled since 2000, and is projected to grow another 50 percent by 2030.

The next country I want to talk about is the United States. As I mentioned, we are on the brink of an election, and the outcome could influence the direction of U.S. energy and climate policy. As Washington’s partisan gridlock has only grown worse, we’ve had no coherent national approach to energy or climate. Our approach has been essentially ad hoc.

On the bright side, the Obama administration recently issued new fuel economy and greenhouse gas standards for vehicles that represent the single largest step ever aimed at reducing U.S. carbon emissions. As a result, by 2025, we will see 90 percent increased fuel economy and 40 percent decreased greenhouse gas emissions for the average new vehicle. This is a big deal.

Meanwhile, the state of California, the ninth largest economy in the world, is on the verge of launching a cap-and-trade program. On November 14th, it will auction off more than 21 million greenhouse gas allowances, each representing one ton of carbon dioxide. Once it reaches its full scope, California will have the second largest cap-and-trade program, in terms of emissions covered, in the world – behind only the European Union. California intends to link its program with Quebec’s, and is discussing linking with others, including Australia.

So there is some progress on the policy front in the U.S. Yet, Congress is debating for the umpteenth time whether to pull the plug on a production tax credit that has helped advance wind power, at the very moment that lower natural gas prices threaten to undermine renewables. And, although the Environmental Protection Agency has moved forward on vehicle emissions, it’s unclear how the agency will regulate greenhouse gases from power plants and other stationary sources. If re-elected, President Obama would likely ramp up that effort. Governor Romney, on the other hand, favors stripping the agency’s authority to regulate greenhouse gases.

One wild card is the possibility – and at this stage, I’d say the remote possibility – of a carbon tax as part of a broader fiscal package. You may have heard of our looming “fiscal cliff.” In fact, there is a slew of looming tax- and deficit-related issues, the resolution of which might be eased by the revenue generated by a carbon tax. There’s no big public push for this, but a lot of quiet discussion among people from across the political spectrum and from different stakeholder groups, including some from business. It’s an intriguing possibility, especially since we’ve always assumed a carbon tax was out of the question, but I’m not holding my breath.

I’m afraid that no matter who’s in the White House, the U.S. approach will likely remain ad hoc for the foreseeable future, with partisan politics standing in the way of broader solutions.

Still, natural gas is now the fuel of choice for new power plants, and older coal plants are being retired, although coal exports are up. U.S. oil consumption is projected to remain virtually flat for years to come. Greenhouse gas emissions are down somewhat, although certainly not enough. And looking as far out as 2035, the U.S. Energy Information Administration doesn’t see them returning to pre-recession levels.

The third place I want to talk about, Europe, has done the best job so far of integrating energy and climate policy. Europe 2020, the EU’s overarching growth strategy, spells out specific targets for reducing carbon emissions, increasing energy efficiency and increasing the use of renewable energy.

Europe is a leading producer and consumer of renewable energy. 2011 was the biggest year yet for renewable installations in the EU, with Germany, Italy and Spain taking the lead. Across Europe, 71 percent of new generating capacity in 2011 was renewable, with solar PV accounting for nearly half. In all, renewables accounted for almost a third of Europe’s electricity generation last year, a larger share than either coal or natural gas. And the EU will likely over-deliver on its commitment to cut greenhouse gas emissions 20 percent below 1990 levels by 2020.

The EU’s groundbreaking Emissions Trading System has had its ups and downs, and a lot has been learned along the way. But the ETS continues to demonstrate the practicality and value of the cap-and-trade approach, and remains the bulwark of the emerging global carbon market.

But Europe is facing stiff economic challenges. Cash-strapped governments are reducing their support for renewable energy. The retrenchment in nuclear power following the Fukushima disaster will likely mean increased reliance on fossil fuels. We’ve counted on Europe to lead the global climate effort for many years now. It’s not clear at the moment just how strong a leader Europe can remain going forward.

The fourth and final part of the world I want to talk about today is Australia. As all of you know very well, this nation is blessed with an abundance of natural resources, including large amounts of coal and natural gas. Australia’s electricity mix reflects these home-grown resources … with 78 percent of electricity coming from coal and about 14 percent coming from natural gas (with the natural gas share rising fast). What’s more, exports of coal are growing as Asian demand soars. For the next five years at least, exports are projected to grow an average of 10 percent a year.

Even as Australia remains heavily dependent on coal, though, it has put in place a comprehensive framework to begin the transition to a low-carbon economy. The goal of the Clean Energy Future plan is to reduce greenhouse gas emissions to 80 percent below 2000 levels by 2050. It aims to achieve this in large part through an innovative market-based approach that begins with a fixed carbon price and transitions over time to full-fledged emissions trading. To those of us in Washington now thinking about a carbon tax, it’s very interesting to see how the pricing system was coupled with tax reforms to benefit not only affected sectors but also households broadly. There are lessons to be learned here – about both policy design and politics. And you can be certain that many are watching Australia closely as another important laboratory for carbon trading.

What happens here, in Europe, in the United States and in China is vitally important to achieving progress in the low-carbon transition … domestic policies are where the rubber meets the road. But what about the international climate effort? Twenty years after the first Rio summit, where does it stand?

From the start, there has been tension between two competing approaches – top-down and bottom-up. And the UN process has produced examples of both – top-down in the form of the Kyoto Protocol, and bottom-up in the parallel voluntary framework that’s emerged under the Copenhagen and Cancun agreements. One brings greater rigor – legal and otherwise. But it encompasses a relatively small and shrinking share of global emissions. The other is strictly voluntary. But it has now mustered explicit mitigation pledges from more than 90 countries – including all of the major economies.

Neither approach, of course, is delivering the effort we need. The new round of talks launched last year in Durban is a chance to see if there might be a mid-way approach that draws on the best of both. Countries said in Durban that by 2015, they’ll negotiate a “legal agreement…applicable to all” covering the period starting in 2020. Beyond those basic terms, the Durban Platform is pretty much a blank slate. Filling it in will require new thinking, and real compromise on issues that have bedeviled these negotiations from the start. Issues like the balance of responsibility across developed and developing countries, and how to capture that in a quote-unquote legal agreement.

What we should aim for, I think, is an agreement that’s flexible – one that encourages broad participation by allowing a diversity of approaches. But at the same time, an agreement more rigorous than a strictly voluntary approach, particularly for those who want to play in the global carbon market.

Whatever emerges in 2015, we cannot count on the UN process to drive the global climate effort. With the right kind of agreement, it can be the place to weave together emerging national efforts, and hopefully encourage a stronger collective effort. But we need to tackle this challenge on multiple fronts. And I believe the real drivers for action come not through multilateral talks, but at home.

So far, I’ve talked about some of the forces shaping the global energy future, and the role of policy in facilitating the low-carbon transition, both at the national level and globally. I want to wrap up by highlighting some key priorities if we are to succeed.

The first priority is increased energy efficiency. This one is a no-brainer. It saves money, it reduces emissions, and it improves our energy security. And this is one area where we don’t need to wait for government. There are huge opportunities here, and smart companies are seizing them. The bottom line: We need to push efficiency whenever and wherever we can.

Next, we must take full advantage of natural gas on the way to a low-carbon economy. But in doing so, we must be proactive in understanding and addressing any health and environmental issues associated with fracking. We must minimize leakage of methane. And we must ensure that increased reliance on natural gas does not come at the expense of the renewable and nuclear sources we also need to get us to a low-carbon economy.

Third, and in my view, most important, we must finally get serious about carbon capture and storage. Under any realistic scenario – even if we become masters at energy efficiency – global energy demand is going to rise. Coal and natural gas might not be inexhaustible, but they are certainly plentiful – increasingly so, in the case of natural gas. Under any realistic scenario, we are going to continue burning coal and natural gas for a long time. The bottom line is this: We cannot avoid climate change unless we put in place the technology needed to capture and sequester these emissions. We must ramp up investment in CCS technologies, and enact strong policies to ensure that they are deployed.

As I said at the beginning of my talk, we face two challenges: providing safe, affordable and reliable energy for all, while at the same time protecting the global climate.

The solution to both is a low-carbon economy. And to make that transition, we need a mix of policies to move us in the right direction.

These policies include carbon pricing, mandates where necessary, and targeted incentives for critical technologies.

And these policies are vital because climate change is real; we are already suffering its costs in the form of extreme weather; and the costs will just keep rising unless we act. We need to help the public understand this, so that their elected leaders can acknowledge and address the challenges before us. We need, in other words, to detoxify the issue of climate change. We all have a role to play here. And I’m hoping I can count on each of you to play yours